Back on economic duty

The claim is that this paper reveals something besides confirmation bias. The Mutilated Economy

In the wake of the financial crisis, real GDP in the United States fell 4¼ percent from its cyclical peak in the fourth quarter of 2007 to its trough in the second quarter of 2009, and the unemployment rate rose sharply, reaching 10 percent by late 2009. Moreover, the subsequent recovery in economic activity has been sluggish by historical standards, with real GDP in 2013 only modestly above its pre - recession peak and the unemployme nt rate still nearly 3 percentage points higher than it was through most of 2007. These features of the recession and recovery, coupled with observations by Reinhart and Rogoff (2010) and Cerra and Saxena (2008) that past financial crises tended to be fol lowed by persistent shortfalls in real GDP, have led many to speculate that the financial crisis and ensuing recession have left a permanent imprint on the productive capacity of the U.S. econom

Against what background is this recovery weaker? According to the thirty year trend, we are right on path, toward zero growth. OK, so they start their model as a simple sum of factors in growth, but their cyclic growth fails to include our 30 years of declining real growth? They have left out part of the yield curve.

As shown in the upper left panel of Figure 1.1, the level of potential GDP as of 2013:Q1 now is estimated to be about 6 percent below the trajectory that appeared to be in place based on dat a through 2007 , and the model projects the shortfall to widen to 6 ¾ percent by 2013:Q4.

They have estimated some statistical valid measures based on prior assumptions, namely real growth and potential growth. What is potential growth?  Well, it is basically the long term trend in gdp growth, mainly down from about 5% in 1980 to about .6% today (continuously compounded).

The authors miss this, naturally. But my reader can draw the average trend in long term growth from 1980 to today.

There. If you carefully block out the Bubba Clinton success (all austerity and taxes from 1992 to 2000) then the trend is obvious.  The more crap that comes from DC, the lower our potential growth rate.

In order to consider the utility of Fed doing the QE one has to resort to expectations theory, the idea that the Fed can induce both inflation and expectations of higher inflation. And that is supposed to kick in real growth.  That is the theory, but the actual scheme is to fund Congress so it can spend more which results in lower potential growth.

Now go back to the Bubba Clinton policy, high tax rates and less government.  What happened? Higher potential growth. The authors need another longer cyclic term in their equations.